Centralized Exchanges are “Honeypots for Thieves”, Says Expert

Hackers exploit the middleman in centralized exchanges which is a central point of failure. Cointelegraph spoke to Mihail Mihaylov, Bitsquare’s Chief Decentralist, about the matter.

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Hackers exploit the middleman in centralized exchanges which is a central point of failure. No hacker can penetrate Bitsquare’s decentralized platform as they did with Bitfinex because of the presence of a middleman figure, says Mihail Mihaylov, Bitsquare’s Chief Decentralist.

Mihaylov says to Cointelegraph:

“Traditional centralized exchanges are honeypots for thieves. With a single hack or through social engineering, a crook can get their hands on large sums of coins and a wealth of user data. This has already happened numerous times.”

He explains ways in which Bitsquare is different from traditional exchanges such as Bitfinex.

No middleman, no cry

As a free, open-source and decentralized software, trading is performed directly peer-to-peer without any intermediaries. It solves the problem of having only one way to acquire a decentralized currency - Bitcoin - through centralized exchanges.

Mihaylov says:

“Unlike Bitfinex and other traditional exchanges, Bitsquare has no middleman nor a central server, so there is nothing to penetrate. In addition, Bitsquare relies on security through transparency, rather than from obscurity. The application software is open-source, so anyone can review the code and compile their client directly from source to avoid any suspicion of a virus or a back door. User’s funds and data are stored locally, so they are as secure as the user wants them to be. The internal client wallet offers password protection and is funded directly by the user’s own wallet.”

Bitsquare also doesn’t hold users’ funds or data and no registration. Hence, it is not required to follow the Know-Your-Customer (KYC) and Anti Money Laundering (AML) laws unlike centralized exchanges.. KYC/AML oblige users to register with centralized exchanges using their personal information such as address, utility bills, identity documents etc.

Platform with promising features

Before and after the Bifinex attack on August 2, owing to a security breach, there have been discussions about Bitsquare on Reddit as a platform to embrace. In a thread, some of its promising features were identified even though there were claims that suggest the platform is still at an early stage.

A user noted in another thread that Bitsquare should be more popular. Others share similar views and suggested features they think should be added to make the platform better and more popular. One such suggestion is for Bitsquare to be able to work not only with arbitrable fiat-transfer methods. However, since Bitsquare enables users to buy and sell Bitcoins with fiat currencies and alternative crypto-currencies, while altcoin trades are executed directly over the Blockchain, Mihaylov says fiat trades require traditional money transmitters.

As a result, he added that Bitsquare only supports payment processors who have low risk against chargebacks and sufficient background information to protect users.

He says:

“Nevertheless, the team is constantly scouting for additional payment processors that are safe for users. At the current state we support national bank transfer, SEPA, OKPay, PerfectMoney, Swish and AliPay for national currencies as well as more than 50 altcoins. Payment methods with high chargeback risks like Paypal or credit cards will not be supported.”

Authority to decide the value

Kumar Gaurav, CEO of Cashaa Ltd, believes more in the decentralized exchanges compared to centralized exchange which he says raises a question on the peer to peer concept. To Mihaylov, centralized exchanges are often the target of attacks or part of fraud schemes which undermine people’s trust in online exchanges in general.

He says:

“Just in the light of recent events where a lot of people have lost their fortune, (centralized exchange) raises the concern on how and whom to believe. The idea of Bitcoin or any crypto currency is needed to allow two willing parties to transact directly with each other. And it’s better to have more and more systems where peers must be given an authority to decide the value and make their transaction based on their needs and terms. The services like localbitcoins.com, btc2bid.com, bitsquare are the better fit for this ecosystem than any centralized agency deciding the price for the market.”

Gaurav’s Cashaa is a pure peer-to-peer decentralized platform for users (Fiat or Crypto currency) to transfer their value. Its p2p Bitcoin trading platform BTC2BID, which launched as a beta test three months ago as a product in Southeast Asia.

No trustful decentralized exchanges

However, Dominik Zynis, Advisor to WINGS, opines that there are currently no trustful and cross-chain decentralized exchanges. He cites that the closest one can come to this are synthetic assets like Bitcoin on BitShares.

“So we are left with systems which have some subset of Dapp coins like what Omni, Bitshares and Counterparty (and soon Ethereum based) systems offer. There are however projects which aim to solve the cross-chain integration problem, and should they succeed then we’ll see some people make use of them. However, central exchanges will still fulfill a role for high speed trading.”